Gol Cuts Guidance Following Crash

Nov.27.06 | About: GOL Linhas (GOL)

So, it turns out that plane crashes are a big deal in Brazil, too.

Last week, Gol Linhas Aereas Inteligentes (NYSE:GOL) reduced guidance for the coming year as a result of problems with air traffic delays and reduced passenger demand following (though not directly caused by) their recent crash.

The new guidance for the current year is for a minimum of $1.73 a share, which gives us a PE of about 16; still reasonable, but significantly lower than the prior guidance.

For those who didn't hear, a GOL jet on September 29 collided with a small Embraer business jet from ExcelAire charters that was on its maiden voyage, on its way to being delivered to NY. The investigation of the crash has been inconclusive, but a major factor was that the Embraer jet -- a small northbound jet -- was at the altitude typically reserved for, and assigned to, the southbound jumbo jet traffic. Dozens of radio calls apparently went unanswered right before the crash, and neither plane's anti-collision system issued alerts. The Gol jet crashed, killing everyone aboard, but the Embraer's pilots were able to safely land their plane with relatively minor damage.

There are two upshots to this for GOL as a business concern -- leaving aside the humanitarian disaster, which I think Gol has handled very well in communicating with the families of all those involved.
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One is that Gol is a bit tarnished as a result of the crash of their plane. It seems to me that this is likely to blow over, since of the three parties involved (the Gol pilots, the Embraer pilots, and the air traffic controllers), the blame has so far ricocheted back and forth between the Embraer pilots and the air traffic controllers.

I haven't seen anything that indicates that the Gol pilots did anything wrong, and it's a clear case of a collision and not a defective part (except possibly for the collision warning system) or a deferred maintenance problem or something else that would tarnish Gol specifically (and GOL flies one of the youngest fleets in the world, so while they're a discount airline they're not flying beat up planes). Unlike the Valujet crash in the everglades 20 or so years ago, I don't think this is likely to precipitate the fall of the company (or lead Gol to try to hide by renaming itself).

And the second problem is probably longer lasting, and more easily quantifiable. That problem is that the air traffic controllers in Brazil are staging a bit of a protest of their working conditions, which some argue led to the crash, by doing what they call "working to rule" -- which means following the letter of the rulebook and, one presumes, not stretching their shifts or doing overtime or whatever else they might do to ease the pressures on the system.

That has brought significant delays as the air traffic control system has been forced to cancel some flights and delay others, to the extent that some officials say the system has dropped to half capacity (others deny a significant problem), and nearly half of all flights are now delayed, with 1-3 hour delays not uncommon. That's why Gol issued new guidance, since they're already seeing that this is reducing customer demand to some degree.

And in some broader ways this is Gol's fault, too -- they have democratized the skies by slashing prices to be competitive with long bus trips, and in doing so dramatically increased demand for air travel, which means many more planes share Brazilian airspace now than five years ago ... which means air traffic controllers are overtaxed.

Officials have been quoted as saying that the delays are likely to last until the middle of next year as the system staffing is built to a more appropriate level. That's an awfully long time, and it's likely to continue to depress GOL's earnings a bit from the levels they might otherwise have attained -- current guidance for 2006 is a drop of anywhere from 5-15% from the guidance they had previously issued, so although GOL has not commented in detail on 2007 I would not be surprised to see that forward PE climb a bit from where it sits now at about 12.

What else is likely to happen as a result of this crash? There's certainly the potential that Gol will be blamed -- it was, after all, their plane that crashed, and their passengers and employees who were killed. I haven't noticed Gol named in any lawsuits yet, though the other plane's pilots have been, as have some of the manufacturers (Honeywell, for one, which I presume designed the collision detection equipment or other relevant cockpit gear).

The official government report has so far assigned no blame in the crash -- they said that a flurry of communication between all the parties occurred directly before the crash, but didn't lay blame on anyone ... but the two American pilots of the business jet have had their passports taken away while the investigation continues, and it's certainly in the Brazilian papers with some regularity.

But in my opinion, we're looking at a very unfortunate bump in the road for Gol. Gol is a play on increasing demand for air travel in Latin America -- pure and simple. So in the short term, as demand is depressed due to the air traffic control problems, and potentially due to the public fear of flying (well, fear of crashing, really), the performance of the company will suffer. In the long run, my expectation is that GOL will continue to grow dramatically and put all those shiny new Boeing planes that they have on order to work.

Disclosure: I own GOL shares as of this writing

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